Investors
Investors have many paths to choose from in the quest for a prosperous financial future.
Real estate is a unique investment vehicle. It has a host of advantages that other assets can’t compete with. That’s why even people who have made fortunes in other arenas tend to have a foothold in real estate investing, and why people seeking to build a fortune have real estate squarely in their sights.
Real estate’s reputation as a millionaire-maker is well-earned. With a sound strategy that maximizes the above benefits, you can turn your cash into a cash-flow machine … all because of real estate.
If you are interested in learning more about the opportunity of passive real estate investing, contact us for a risk free consultation.
Here are five reasons to invest in real estate apartment syndication:
Diversify Your Portfolio
The point of diversifying a portfolio is to not put all your eggs in one basket. For example, you wouldn’t want to put all your money in Starbucks stock. If scientists ever discover that coffee causes cancer (God forbid), your investment will be worthless overnight.
People with money invested in bonds, stocks, or mutual funds could diversify their portfolio by adding real estate assets. Real estate runs in different cycles than other investment vehicles. While stocks enter a slump, real estate might be doing fine, and vice versa.
That isn’t the only way real estate can be used to diversify an investment portfolio, however. Consider the opportunity to:
Easy Access to Big Deals
Diversify Geography
Real estate responds to local conditions. If you have an asset in Ohio and another asset in Georgia, you are somewhat insulated from shifts in local economies. The economy in Ohio might start to suffer, while Georgia booms at the same time.
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Diversify Asset Classes
Real estate runs in cycles, but different classes experience different cycles. You could diversify your holdings across residential, commercial, and industrial real estate to catch different upswings at different times.
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Diversify Strategy
There isn’t just one way to invest in real estate. You could invest in development, rentals, flips, condo conversions, notes, tax liens, or become a private lender. You have many options.
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Diversify Risk
Finally, real estate has a range of risk profiles for people who are at different stages in their investing life. You could go low-risk by investing in a Class A REIT, or high-risk/high-return by investing in a Class C reposition of a vacant building or Class A development project. Equity and debt investments have different risk profiles as well.
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Some of the biggest money in real estate is made in the biggest deals. We’re talking about acquisitions of apartment buildings, office buildings, big-box shopping centers, industrial plants, or whole portfolios of buildings with purchase prices between $5 million and $500 million!
Deals this big have access to favorable financing terms and significant advantages due to economies of scale. If a house lies vacant for two months or the HVAC blows, the sudden loss of cash flow could seriously threaten a single-family-home investment. If one apartment out of 500 loses an HVAC or a tenant, that’s much easier to absorb with 499 other units to offset it.
If you just have $25,000 to play with in your IRA, you may think you are shut out from those kinds of deals. However, many of these deals are not bought by one rich guy. Multiple investors pool their money to buy the big asset through a process called “syndication.” These deals give even small-dollar investors a chance to own a small piece of 100 units or more.
Passive Investing
Making big business ROI usually requires a lot of elbow grease on the part of the business founder—lots of labor, effort, and time invested.
Real estate is different. Through the creative use of property managers, mortgage wraps, or through investing in REITs, syndications, and notes, real estate investors can create streams of income that require little or no effort at all.
This is sometimes called “passive investing.” It’s usually not appealing to be “passive,” so investors sometimes think of passive investments as sources of “mailbox money”—checks just show up in the mailbox, without them having to hammer a nail or punch a clock.
Anyone who thinks real estate investing always has to involve tons of sweat and headaches expended on being a “landlord” should brush up on the concepts of “passive investing.”
Tax Advantages
Real estate income isn’t just measured in rents collected, mortgages paid down, or equity gained on resale. It should also be measured in money that you would have paid to the IRS, but you no longer have to pay because of real estate’s privileged position in the tax code.
Basically, with the help of a knowledgeable tax preparer, your real estate investments will save you big money at tax time. This comes in the form of:
Lower Tax Rates
Rental income is taxed at a lower rate than W2 income or ordinary business income, so you save money right off the bat.
Tax Write-Offs
If your real estate investment is held in the name of a business entity, like an LLC, any expenses incurred in the management of that real estate act as expenses, which reduce your pre-tax income. Deductible expenses include travel to the property, mortgage interest and insurance, repair expenses, administrative expenses, and more. In some cases, your car could even become a “company lease” that you get to write off.
Depreciation Expense
This is technically a “tax write-off,” but it deserves special mention. The tax code allows you to write of a certain amount of the value of your property every year as a “depreciation expense.” No money leaves your pocket—it reflects the notion that assets, like cars, become less valuable over time due to wear and tear.
Deferred Taxes
Real estate investors may owe a large capital gain tax bill if they sell a property at a profit. However, if the investor flips that profit into another (usually bigger) property, that capital gains tax can be deferred indefinitely. This is called a “1031 exchange.” Many rules apply to this process, so seek the advice of a qualified 1031 exchange custodian.
Manageable Risk
Property ownership comes with substantial risk. The property could burn down. A unit could go unexpectedly vacant. A tenant could slip on the porch and decide to sue the landlord. If a landlord defaults on a mortgage, the lender could attach wages or go after the investor’s other assets (home, bank account, retirement accounts, vehicles, other investments) to try to collect on the debt.
If this makes real estate investing sound scary, take heart—there are actually many ways to manage the risk incumbent in real estate investing. Examples include:
Variable Leverage
Many lenders will write a mortgage for up to 80% of the property’s value … but you don’t have to borrow that much. If you want less risk associated with a higher mortgage payment, consider 70%, 50%, or no mortgage at all.
Insurance
Adequate property insurance will make you whole if your property burns down, floods, or otherwise succumbs to disaster. Umbrella liability insurance will also protect you from slip-and-fall lawsuits from your tenants by paying out in the event of a judgment.
Multi-Unit Portfolios
Spreading the risk across multiple units can protect you from vacancies and breakages. Remember, one vacant unit in a 500-unit portfolio is not the disaster it would be in a one-unit portfolio. Even if you don’t have a lot of money to invest, you can access multi-unit portfolios through REITs and syndication.
Limited-Liability Entities
Many investments are held not in the names of individuals, but in the names of limited-liability entities controlled by those individuals—corporations, LLCs, limited partnerships, land trusts, etc.
Lawsuits filed against the property owner may be limited to the assets owned by the entity—usually the property and nothing else. Hidden behind enough LLCs, it may be impossible for lawyers to even find out who owns the property to serve them papers!
Non-Recourse Loans
Some large investments are eligible for “non-recourse loans,” meaning the lender can foreclose the property in the event of default, but the lender can’t attach wages or target the borrower’s other assets.
Passive Investments
Passive investments in REITs or syndications add another layer of protection to the non-recourse nature of the investment. Not only can no one target the investor’s other assets, but the investor’s credit isn’t even at risk.
Jason's Story
Jason is an IT professional by day. He is in his late 30’s. He has always loved the idea of investing in real estate. Jason saved enough money to buy a 3 unit apartment building. He decided to save money and manage the property himself. By doing this, he didn’t know he needed a rental housing license, and a new lead certificate every time a tenant moved out. He let one tenant pay late because he felt bad and didn’t want to upset the tenant. Once the other tenants found out, they also began paying late. Jason wanted to get them back on track, but didn’t know what to do. He finally turned to a property manager, who worked diligently to get the property up to date on licensing, and tenants paying on time. Then the roof started leaking.
Jason hadn’t saved enough money to handle any large repairs. This became a problem as the roof continued to get worse. The tenants started getting water in their unit and all over their belongings. Jason’s property manager worked to get a contractor in at a reasonable rate and work with him for payment terms. After so many issues, Jason was ready to give up his real estate investment dream….until he heard about PAVE Capital.
With PAVE, Jason can invest as little as $25,000 and be a part of a large apartment syndication. He doesn’t have to coordinate inspections, deal with finding tenants, or any building issues. He trusts in the team at PAVE Capital to facilitate the appropriate professionals in each deal. Jason sleeps better at night knowing he still has his hand in real estate, without all the worry and stress. And the best part is, Jason is seeing better returns than he had ever imagined.